Cooperative apartment buildings or cooperatively owned clusters of homes have operated with the building or cluster being owned by a single entity and with the occupants owning proportional stock interests in the single entity. Occupants of such cooperative apartments or homes have borrowed monies using their resalable interests in stock in the single entity as collateral. Such single entities have borrowed monies against such building or cluster ownership through mortgage loans that were subsequently packaged as guaranty for xe2x80x9cderivativexe2x80x9d mortgage backed securities.
Single family homes are traditionally sold one at a time at fair market value, whether as resales by owners or new sales by developers or builders. Mortgage loan lending sources, such as banks and other mortgage loan providers, lend against the fair market, retail appraised value of the home. The fact that lenders lend against the retail value of homes is indirect proof that no wholesale market exists in single family homes.
Credit insurance has traditionally been available to home owners as a policy specifically written to cover individual mortgage loans and not treated as casualty insurance. Such insurance has increased the willingness of lenders to make loans in certain circumstances.
Where home owners have sufficient equity in excess of any mortgage loan balance, home owners have been able to obtain home equity loans the proceeds of which may be used for purposes unrelated to the home, such as starting a business.
In some jurisdictions such as the United States, homeowners have an absolute right to prepay home loans without penalty. This may result in unexpected liquefying of bonds.
The present invention comprises a method of creating and selling marketable collateral backed debt instruments comprising creating a debt-instrument-issuing-entity which lends mortgage or other lien-backed monies to a group of property owners each owning his or her property in a fee simple or other mortgageable or transferable interest in property against which a lien may be placed. Each property owner retains his title or other interest pending a default of the entity. This invention contemplates the entity obtaining cross-collateralized mortgage or lien agreements from each of such property owners promising to pay his or her secured loan interest and debt and; in addition, such debt of each and every other property owner limited to the value of his or her equity, if any, remaining in his or her subject property.
The entity issuing or facilitating the issuing of the debt instrument may promise to honor the instrument obligations or may consolidate or pool the promises of others, such as a group of property owners, to honor the instrument obligations or the entity may do both. Whether the entity promises to honor the obligations of the debt instrument or not, the entity obtains from the group of property owners each and every owner""s guaranty that he or she
a) will pay the instrument""s principal and interest or sums at least equal thereto; or
b) agree to be jointly and severally liable with all other owners in the group to pay such principal and interest.
The guarantees from each and every owner in the group are collateralized by the lien, mortgage, or other hypothecation of each property. Each debt instrument is thus collaterally and jointly and severally guaranteed by such owners. Such collaterally guaranteed instruments provide substantial security to the debt instrument holder even where reasonable limits are placed on the total obligations of each owner such as limiting the owner""s liability for the debt of others to the equity in his own home.
Further, the invention contemplates that to strengthen the debt instrument""s credit the entity may obtain property lien and loan cross collateralizing agreements from such property owners in which the owner promises to pay his or her group (or common) charges and those of each and every other owner in the group, as defined and declared by the debt-instrument-entity. The property owners are jointly and severally liable for each others obligations to such entity. The entity then issues debt instruments, such as notes and bonds, which are backed by mortgages or liens and cross-collateralizing agreements. Personal liability of each property owner for the share of group (or common) charges above the amount associated with his or her own property may be limited to his or her equity in said property.
The present invention facilitates each and every member of a group of property owners in obtaining credit through the placing of mortgages or other liens upon group members properties to back bonds issued by a financing entity. Each bond is backed by all or a plurality of properties in the group.
It is a feature of the invention that, since each and every participating property owner places his or her property at risk to be sold to guarantee the performance of each and every member of the group with respect to debt instruments (i.e. notes or bonds) being issued by the entity, such debt instruments have higher or enhanced credit ratings and will be marketable at reasonable yield rates. Each individual loan is collateralized by the mortgage or other lien on the property of the individual signing the loan and further each loan is cross-collateralized in that additional mortgages or other liens from group members further secure repayment of such loan.
It is also a feature of the invention that when prepayment of a loan is made by one or more of the group of property owners, in cases where such prepayment is allowed as in real property mortgages, the interest income flow to debt instrument holders is protected by the other property owners through their commitment to adjust their periodic payments to the entity to cover any short-fall due to any inability of the entity to reinvest the prepaid principal at a yield rate equal to or higher than that promised such holders. Liability under this feature is limited to the equity in each homeowner""s subject property.
It is also a feature of the invention that the group of property owners have a commonality created by their participation in the group and which may include physical proximity, ownership of shares in the entity and participation in common facilities and social programs which may or may not be owned and or administered by the debt-instrument-Entity.
An additional feature of the invention is that the organizing entity may enter into cross-collateralization agreements with other such entities so as to create a reinsurance pool, an Entity of entities. In such case no individual property owner liability shall extend beyond the equity in his or her property.
Another feature of the invention is that the number of participants in each entity be small enough so as to facilitate a community of members who can be well acquainted with one another while at the same time large enough to assure adequate spreading of risk from an actuarial standpoint. It has been determined that this number is at present approximately three hundred property owners. Whatever this number is, the membership total in an entity shall attempt to approximate it. Acquaintanceship of neighbors has been shown to foster a sense of well being in a community and a desire of property owners to properly service home debt obligations; it has also been shown that risk pools large enough to absorb individual negative experiences without major disruption will qualify for lower insurance rates or higher credit ratings.
An additional feature of this invention is the potential for credit insurance as an aspect of an overall casualty insurance agreement obtained by the entity in behalf of the property owners. The cross-collateralization within the entity renders a credit default a group casualty rather than an individual incident. For this reason, casualty insurers may be induced to include credit insurance as indistinguishable from fire or other casualty insurance that may be offered the entity or its property owners. Generally, credit insurance is based significantly on xe2x80x9cmoralxe2x80x9d risk where underwriting criteria include past installment debt payment practices often unrelated to housing or rent. The present invention will permit a first layer of credit risk to be absorbed internally by the Entity using reserves or assessments, thus requiring only a second layer of risk to be covered commercially. The second layer of risk may be limited to a situation in which, for example, 10% or more of the homeowners are simultaneously in default. This is extremely unlikely and the events that might bring such a situation about have more in common with casualty risks than general credit risks. Therefore, property and casualty risk underwriters, as opposed to credit risk underwriters, will have the expertise to underwrite such credit risks, a feature made possible by the present invention. Consolidating credit insurance with fire insurance will create underwriting efficiencies and enhance overall credit worthiness of the Entity, thus reducing interest costs.
It is also a feature of this invention that the property owners may be organized into an entity in advance so as to obtain, in advance of home purchase, a funding commitment from a permanent lender or bond underwriter or bond purchaser. This advance commitment will secure bridge borrowing such that a mass purchase by the entity of a quantity of homes may result in a substantial discount in acquisition cost. The mass purchase creates a wholesale purchase at a wholesale price. This discount shall inure to each homeowner as xe2x80x9cfiscal sweat equityxe2x80x9d and may obviate the need for down payments to satisfy the equity requirements of lenders. Traditionally, xe2x80x9csweat equityxe2x80x9d is earned by homeowner candidates by providing manual labor to improve a candidate property and thereby earn a portion of its value or purchase price; under the present invention xe2x80x9csweat equityxe2x80x9d is earned by the homeowner by agreeing to join with others in a group, wholesale purchase, below the independent appraised retail value. Homes offered individually for resale later may be priced at full retail value which will include both the spread between retail and wholesale at the time of original purchase plus any subsequent appreciation.
It is another feature of the invention that the Entity identifies homeowner group candidates, approves the candidates for participation, collects their monthly payments, and enforces the individual obligations; this effectively permits the borrower to perform as xe2x80x9cin kindxe2x80x9d services the marketing, credit approval, servicing, and enforcement functions that ordinarily increase lender costs; accordingly, lower interest rates are possible while still providing lenders with the same level of return on capital. Lower interest rates have the effect of increasing the probability of performance and therefore enhance borrower creditworthiness.
It is a further feature of this invention that equity obtained through purchase discount or other means may enable the sale of bonds or other forms of permanent financing instruments in an amount exceeding the aggregate cost of the entity property owners"" property while not exceeding the aggregate fair market value of the aggregate property. By this method, the entity may obtain funds which will be available for income earning endeavors such as the operation of small businesses or the acquisition of commercial real estate. Since the cost of such overage funds will be covered in the monthly property owner payments, these funds may also be available to be leveraged for additional finding from government agencies such as, in the U.S., the Small Business Administration.
It is also a feature of this invention that an international secondary market may be created to trade the entity bonds, which market will be made viable through the cross-collateralized structure of multiple entities. The cross-collateralized structure of the multiple entities will diminish fears of political risk and may attract political insurance from international organizations such as the World Bank or the U.N. The liquidity provided by such a market will further reduce the cost of funds thereby improving the ability to pay of property owners and enhancing the strength of the overall inventive strategy. Such a market may be Internet based due to its international nature.
Another feature of the invention made possible by the cross-collateralization of multiple entities will be the exchange of information relating to the success of small businesses or other ventures. The Entity of entities shall act as a clearing house of ideas and information including home construction and building technology and an inventory of business models suitable for such entities (using finds not earmarked for homes) to start and operate. Such ideas and information will therefore inure to the benefit of all of the entities.
It is a final feature of the invention that the portfolio of bonds securitizing the homeowner debt may consist of individual bonds maturing at staggered rates of time such that the average maturity of all the bonds approximates the average holding period of comparable homes; the maturities are staggered such that the Entity is refinancing or rolling over portions of its debts either annually or semi-annually. The continual act of refinancing permits the entity to absorb cash from any prepayments of homeowner debt for any reason, the most likely of which is the sale of the home to another party who chooses not to use Entity financing. The effect is that excess cash which may not be invested at rates sufficient to cover promised yields to bondholders will not be on hand for more than six months if that is the rollover frequency of the Entity. Any deficits created by reinvestment negative spreads will be small enough to be absorbed as ordinary expense of the Entity. This feature will enable the Equity to offer bond buyers instruments protected from prepayment risk and thereby obtain reductions in borrowing costs.